The Enron Debacle

• Home | Quick Links
• About | Tour | Search
• Business Articles
• Business Bookmarks
• Business Books
• Business Databases
• Business School
• Cases (Examples)
• Essays
• Journals
• Subject Centers
• Tutorials
• Site Map

Read an Excerpt
CNNMoney

Here you will find links to news coverage of the scandal and the trial of Enron CEOs Jeffrey Skilling and Kenneth Lay in 2006 along with background reports, key documents and excerpts from selected contemporaneous articles.

Note: designates a University of Florida Libraries subscription database.

• Bigger than Enron
  Frontline Documentary
• BBC
• CNNMoney.com
• Enron (Wikipedia)
• Financial Times
• FindLaw
• Houston Chronicle
• LLRX.com:
  Collapse of Enron
• Law Library of Congress
• Washington Post

Key Documents

• Andersen Memo
• Enron Bankruptcy Docs
• Power's Report:
  Executive Summary
  (February1, 2002)
• Skilling Indictment
  (February 18, 2004)
• 2001 Enron Annual Report
• 10-K April 2001
• 8K Bankruptcy

It's the Enron Effect. By Christopher Palmeri. Business Week. May 30, 2006.
"The convictions of executives Kenneth Lay and Jeffrey Skilling send a powerful signal to would-be white-collar criminals -- for now."

Which Picture of Skilling Will Enron Jurors Believe? By Alexei Barrionuevo. New York Times. April 21, 2006.
"In eight days on the witness stand Jeffrey K. Skilling accomplished much of what he needed to do in front of the jury hearing his criminal case, avoiding any major gaffes while staunchly maintaining his innocence. But in the end, the performance by Enron's former chief executive was far from perfect, and may have revealed to the jury more than he and his lawyer wanted." In ProQuest.

Who Audits the Auditors?

"As four government agencies and six committees of Congress begin to investigate the Enron failure, it's important to recognize that this is not just about Enron and its auditor, Arthur Andersen. We need to look at the entire system of gatekeepers — auditors, corporate boards, analysts, ratings agencies, investment bankers, lawyers and accounting standard-setters — who operate and regulate our financial markets. The confidence of individual investors depends on honest, independent gatekeepers. Sadly, the collapse of Enron shows this system urgently needs reform.

"I know how tough a task this is. When I was chairman of the Securities and Exchange Commission, we put into place a number of reforms to improve audits and minimize conflicts of interest. But we were largely unsuccessful in persuading accounting firms to separate their auditing businesses from their consulting businesses and in convincing the auditing profession to do a better job of policing itself. Congress and federal regulators should use this scandal to demand some long overdue changes.

"Our financial reporting system — which is supposed to inform investors about the health of companies — has in many respects devolved into a numbers game. Companies can't afford to disappoint Wall Street's earnings expectations, so they are tempted to push their earnings, even to the point of deception. And aggressive or sometimes creative accounting is often overlooked by auditors preoccupied with the desire to preserve lucrative auditing and consulting contracts."

[Source: "Who Audits the Auditors? By Arthur Levitt. New York Times. January 17, 2002. In ProQuest.

Accounting in Crisis

"A few years ago, it would hardly have seemed possible: The nation's attention, from the halls of Congress to main street, has been riveted on an accounting scandal, a subject so abstruse it rarely makes the front page. But as the tawdry chapters in the Enron  fiasco unfold like some penny dreadful, with explosive revelations of hidden partnerships, shredded documents, and shocking conflicts of interest, it's clear that the fall of Houston-based Enron is in a class by itself.

"Everything about this debacle is huge: a $50 billion bankruptcy, $32 billion lost in market cap, and employee retirement accounts drained of more than $1 billion. The lapses and conflicts on the part of Enron's auditor Arthur Andersen are equally glaring. Andersen had been Enron's outside auditor since the 1980s, but in the mid-1990s, the firm was given another assignment: to conduct Enron's internal audits as well. In effect, the firm was working on the accounting systems and controls with one hand and attesting to the numbers they produced with the other. And the ties went even deeper: Enron's own in-house financial team was dominated by former Andersen partners. Then, as the firm began its last, rapid plunge toward bankruptcy, the Andersen auditors began frantically tossing records of their work into the shredder.

"For working both sides of the street, Andersen was rewarded richly. In 2000, the firm earned $25 million in audit fees from Enron, and another $27 million in consulting fees and other work. Sure, it's possible that Andersen's auditors blocked all of those connections from their minds and managed still to render an objective opinion, but even former insiders wonder how. 'There were so many people in the Houston office who had their finger in the Enron pie,' a former Andersen staffer says. 'If they had somebody who said we can't sign this audit, that person would get fired.'"

[Source: "Accounting in Crisis. Business Week Online. By Nanette Byrnes, et. al. Business Week January 28, 2002, Issue 3767, p. 44. In ABI/INFORM.]

Sherron Watkins' August 2001 Memo to Ken Lay

"I am incredibly nervous that we will implode in a wave of accounting scandals. My eight years of Enron work history will be worth nothing on my résumé, the business world will consider the past successes as nothing but an elaborate accounting hoax. Skilling is resigning now for 'personal reasons' but I would think he wasn't having fun, looked down the road and knew this stuff was unfixable and would rather abandon ship now than resign in shame in two years.

"Is there a way our accounting guru's can unwind these deals now? I have thought and thought about a way to do this, but I keep bumping into one big problem - we booked the Condor and Raptor deals in 1999 and 2000, we enjoyed wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001, and it's a bit like robbing the bank in one year and trying to pay it back two years later. Nice try, but investors were hurt, they bought at $70 and $80 a share looking for $120 a share and now they're at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled 'redeployed' employees who know enough about the 'funny' accounting to get us in trouble."

[Source: "Text of Letter to Enron Chairman After Departure of Chief Executive." The New York Times. January 16, 2002. In Proquest]

Behind the Scenes

"The story behind Ms Sherron Watkins's letter is much more than that. It involves a power struggle over the direction of Enron as it committed itself to the extremely unusual and tangled partnership structures that eventually contributed to its undoing. People familiar with that struggle say the issues ranged from the ethics of Enron's actions to a battle for the job of chief financial officer at the Houston-based energy-trading company. The partnerships -- called LJM Cayman LP and LJM2 Co-Investment LP -- were formed in 1999 by then Chief Financial Officer Andrew Fastow, who also ran the entities and owned part of them. From the beginning, Mr. Fastow, Mr. Kenneth Lay and other top company officials said the LJM partnerships were designed to do business deals with Enron and help the energy company manage its financial risk.

"Mr. Fastow had been widely viewed within Enron as a close ally of Mr. Jeffrey Skilling, whose sudden resignation last August raised investor concerns and contributed to the company crisis. For his part, Mr. Fastow believed that Mr. Jeffrey McMahon wanted his job as chief financial officer and that Ms. Watkins was an ally in that effort, said a person familiar with the matter. Mr. McMahon was named chief financial officer last October when Enron replaced Mr. Fastow because of rising controversy surrounding the partnerships."

[Source:  "Publicized Letter to Lay Involved Struggle Over Enron's Direction." By John r. Emshwiller and Kathryn Kranhold. The Wall Street Journal. January 16, 2002, p. A4. Article Abstract in ProQuest.]

Enron's Legacy?

"Fairly" is the forgotten word of American accounting. But the Enron debacle threatens to make it a very contentious word as scared auditors suddenly decide that they should rein in corporations.

"The auditor's letter in every annual report certifies that the statements therein 'present fairly, in all material respects, the

 financial position' of the company, 'in conformity with accounting principles generally accepted in the United States of America.'

"Enron was not the only company to push the rules, to be 'aggressive in its transaction structuring,' as an Arthur Andersen partner put it in one memo. Many auditors have been willing to sign off on anything that could be shoehorned into the letter of the rules, whatever their spirit, and have been willing to overlook rule violations if the amounts involved could be deemed immaterial.

"There is a historical pattern in such things, one that was recognized by the economist Charles P. Kindleberger in his classic 1978 book 'Manias, Panics and Crashes.' 'The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom,' he wrote. After the revelation of the fraud, and the collapse of the boom, he added, 'the curtain rises on revulsion.'

"There is no proof of fraud at Enron, but the revulsion is clear. 'All the accountants with the Big Five will be tougher,' Mr. Kindleberger forecast in a telephone interview yesterday. 'There is a lot of turmoil going to occur in financial accounting.'

"'I would,' he added, 'love to be young enough to write a chapter on Enron. But I am slowing down.' He is 91.

"Just as the 1929 crash led to the establishment of the Securities and Exchange Commission, the current S.E.C. chairman, Harvey L. Pitt, vows to come up with a new body to discipline accountants. His proposal yesterday sounds promising."

[Source: "An Enron Legacy: Lower Reported Profits." By Floyd Norris. The New York Times, January 18, 2002. In Proquest]

The SEC's Harvey Pitt Called for Reform

"Over the last decade or so, this Country's vaunted system of disclosure, financial reporting, corporate governance and accounting practices has shown serious signs of failing to keep up with the needs of today's investors, our economy, and new technology that makes rapid communications not only possible but essential. The latest example – a most tragic and unprecedented one – is the failure of Enron.

"There are two distinct facets to the 'Enron situation.' The first is finding out who did, or who failed to do, what, and who bears responsibility for the horrendous losses imposed on Enron's investors and employees. As I have said before, the Commission is actively and aggressively investigating these circumstances. Our investigation will be thorough, and will deal effectively with any wrongdoing that may have occurred. The second facet of Enron is to see what lessons we can begin to learn about how to prevent failures like this from recurring.

"Our disclosure and financial reporting system is still the best in the world, but it has long needed improvement. Its inadequacies are more visible after Enron's failure, and the need for change cannot be ignored any longer. This is not a problem that arose overnight. Investors here and abroad are entitled to rely upon our system as the finest in the world. We intend to fulfill that responsibility.

"There are many aspects of this problem. Our system of periodic disclosure, for example, is old and not good enough. Today, disclosures are made not to inform, but to avoid liability. We need to move to a system of 'current' disclosure. The present system, which has been in effect for 67 years, doesn't provide for 'current disclosure. Financial disclosures are dense, impenetrable. We have called for plain English financial statements. Corporate governance issues and the role of Audit Committees are also in need of review. We recently alerted companies and their Audit Committees of the need for transparent disclosure of key accounting principles and policies in annual reports. Very shortly, we intend to issue a statement on MD&A disclosure that seeks to promote greater consideration of the intent of MD&A, which is to give investors a view of the company through the eyes of management, on critical financial issues.

"We need more prompt action by the FASB, the nation's accounting standard setter. And, we at the SEC need to improve the way we oversee our disclosure and financial reporting system.

"Finally, there is a need for reform of the regulation of our accounting profession. We cannot afford a system, like the present one, that facilitates failure rather than success. Accounting firms have important public responsibilities. We have had far too many financial and accounting failures. The Commission cannot, and in any event will not, tolerate this pattern of growing restatements, audit failures, corporate failures and investor losses. Somehow, we must put a stop to a vicious cycle that has been in evidence for far too many years."

[Source: Public Statement by SEC Chairman: Regulation of the Accounting Profession. By Harvey L. Pitt. U.S. Securites & Exchange Commission. SEC Headquarters, Washington, D.C. January 17, 2002.]

Stock Options Role in Enron's Demise

"Nothing about Enron's demise was surprising; nor is what must be done

"With each fresh turn in the Enron tale, one conclusion gets plainer. America's biggest bankruptcy was not a result merely of commercial misfortune or personal crookedness. The collapse was possible only because of flaws in the way that American capitalism has worked over the past decade. These flaws were widely known, and much discussed. But as America's economy and stockmarket boomed, few had an interest in fixing them. Presumably that will now change.

"America's love affair with equities played a part in Enron's failure. The pay of senior executives and board members hangs on the performance of a company's shares--their reward for good performance aligned their interests with those of shareholders, supposedly. In practice, the alignment of interests is imperfect.

"Equity-related pay schemes tempt managers to seek to boost the share price in the short term, giving them the chance to cash out their stakes, to the detriment of the company and its shareholders in the long run. Enron's managers made wide use of "special purpose entities" (SPEs), vehicles that shifted losses and debts off the company's balance sheet. The company's directors should have asked tough questions about the practice, but they did not. After all, a lot of personal wealth was at stake, for Enron's creative accounting suggested to investors that the company was more profitable and less leveraged
than it really was. That kept Enron's share price up. The interests of "insiders" were thus at odds with those of outside shareholders. If managers and directors were not allowed swiftly to sell the shares they were given, then interests would be better aligned. Last year, executives sold stacks of shares even as Enron got into trouble."

[Source: Economist.com. January 17, 2002.]

The Economist Called for Accounting Reforms

"Yet there is one big issue that should now attract more attention: the governance of the public capital markets, and especially the role played by auditors. The capital markets, and indeed capitalism itself, can function efficiently only if the highest standards of accounting, disclosure and transparency are observed. In America, well-policed stockmarkets, fearsome regulators at the Securities and Exchange Commission (SEC), stern accounting standards in the form of generally accepted accounting principles (GAAP), and the perceived audit skills of the big five accounting firms, have long been seen as crucial to the biggest, most liquid and most admired capital markets in the world.

"The collapse of Enron is now raising some big questions. Andersen, the company's auditor, has admitted to an 'error of judgment' in its treatment of the debt of one of Enron's off-balance-sheet vehicles; these vehicles led to an overstatement of profits by almost $600m over the years 1997-2000. This week Andersen fired the partner in charge of the Enron audit, when it found that he had ordered the disposal of documents even after the SEC had subpoenaed the firm as part of its investigation into Enron. This is not the first time that Andersen has been in trouble: last year, it was fined over its audit of another Texan company, Waste Management, and it also had to settle a suit over the audit of Sunbeam, a Florida-based company.

"If this were simply a case of one accounting firm doing wrong, that would be regrettable but containable. Andersen may go under thanks to Enron litigation anyway. But the truth is that it is not unique. It may have been unusually culpable, but all the accounting firms have made mistakes in the past. Only this week, KPMG became the latest to be censured, this time for breaking rules barring investment in audit clients.

"That points to the need for systemic reforms, in three areas. The first is the regulation of auditors. For years the profession has insisted that self-regulation and peer review are the right way to maintain standards. Yet Enron has shown that this is no longer enough. The Public Oversight Board should be turned from a self-regulatory body appointed and financed by accountants into a statutorily independent organisation reporting to the SEC. And it should be given teeth, including the power to ban or fine auditors for misdeeds.

"Second is the urgent need to eliminate conflicts of interest in accounting firms. Andersen collected audit fees of $25m from Enron, its second-biggest client, last year, but it earned even more for consulting and other work. The accounting firms have fought off attempts to limit or stop them undertaking consulting work for audit clients; they insist that there is no real conflict of interest. Yet if confidence in auditing is to be regained, perception is as important as reality. The SEC should now pursue again the ban that its previous chairman, Arthur Levitt, sought to impose in 1999. There is also a strong case for compulsory rotation of auditors, say every seven years: Andersen had audited Enron since its birth in 1983.

"Lastly come America's accounting standards. GAAP standards used to be thought the most rigorous in the world. Yet under British standards, Enron would not have been able to overstate its profits by so much. And, once again, although Enron may have been egregious, it is not a lone offender. Several dotcoms and technology companies have used what is euphemistically called “aggressive accounting” to boost reported earnings. Too many companies have got away with “pro forma” accounting that delivers nice numbers by omitting such items as stock write-offs, special transactions, interest charges or depreciation. And the accounting treatment of stock options has long been a disgrace.

"The SEC and its standard-setting body, the Financial Accounting Standards Board, should now revisit GAAP; they might even embrace international accounting standards instead. There is a lesson from British experience in the 1980s, when several audit scandals led to both tougher regulation and more rigorous accounting standards. The Enron scandal shows that America can no longer take the pre-eminence of its accounting for granted. That is a far bigger concern than any number of congressional investigations."

[Source: "The Real Scandal." Economist.com. January 17, 2002.]

Black Box Accounting

"Just 30 years ago, the rules governing corporate accounting filled only two volumes and could fit in a briefcase. Since then, the standards have multiplied so rapidly that it takes a bookcase shelf -- a long one -- to hold all the volumes.

"As the collapse of Enron has made painfully clear, the complexity of corporate accounting has grown exponentially. What were once simple and objective concepts, like sales and earnings, in many cases have become complicated and subjective.

"Add the fact that many companies disclose as little as possible, and the financial reports of an increasing number of companies have become impenetrable and confusing. This is true not just for investors, but for Wall Street analysts, corporate executives with master's degrees in business administration and, sometimes, even the outside auditors reviewing a company's books.

"The result has been a rise in so-called black-box accounting: financial statements, like Enron's, that are so obscure that their darkness survives the light of day. Even after disclosure, the numbers that some companies report are based on accounting methodologies so complex, involving such a high degree of guesswork, that it can't easily be determined precisely how they were arrived at. Hard to understand doesn't necessarily mean inaccurate or illegal, of course. But, some companies take advantage of often-loose accounting rules to massage their numbers to make their results look better.

"The bottom line: There is a lot more open to interpretation when it comes to the bottom line."

[Source: "Deciphering the Black Box: Many Accounting Practices, Not just Enron's,  Are Difficult to Penetrate." By Steve Liesman. Heard on the Street.  The Wall Street Journal. January 23, 2002, p. C1. In ProQuest.]